Tax trim hardly worth trumpeting

The federal government’s assertion that its 1 percentage point cut in the company tax rate will help the non-resources sector cope with the mining boom has gone largely uncontested.

The move to trim the rate to 29 per cent from July 2013 is supposed to help companies under stress from the rising dollar and wages pressure from soaring energy prices.

Treasurer
Wayne Swan
has repeatedly trumpeted the company tax rate trim as the answer to the two-speed economy. In a speech last week, he said it would help Australian industries attract mobile capital.

No business leader could argue that the reduction in the statutory 30 per cent rate is unwelcome.

However, the cut is being touted as capable of partially offsetting the soaring Australian dollar which, at a two-year high above US94¢, is 27 per cent above its average level for the past decade.

Companies under pressure from the high currency, which makes exports more expensive and less competitive, include
Cochlear
,
Foster’s Group
,
CSL
and
Aristocrat
.

Deutsche Bank’s local analysts, in a note to clients, warn of further risk to company earnings from a continued strong Australian dollar, especially for those heavily reliant on offshore revenue. The bank is assuming the dollar will fall to the low US80¢ range in the next year.

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“But we see a risk of this not eventuating and this could lead to a sequence of currency-related earnings downgrades for affected stocks," Deutsche says.

The Henry tax review concluded that Australia’s company tax rate of 30 per cent was “high" compared with other small to medium-sized Organisation for Economic Co-operation and Development economies. Australia last cut its corporate rate, from 36 per cent to 30 per cent, in 2001.

The average of similar OECD economies is about 25 per cent – the rate Treasury secretary
Ken Henry
recommended the government reach quickly so that Australian companies remained competitive in an increasingly globalised economy.

However full dividend imputation for shareholders in Australia – and also in New Zealand – does reduce the impact of company tax on shareholders.

The 29 per cent rate will improve Australia’s competitiveness by just one place in the OECD ranking.

If 30 per cent was too high according to Henry, then 29 per cent does not appear to be much of an improvement.

While other factors beyond tax, including political stability, regulatory certainty, education and workforce skills, can help determine foreign investment, company tax is important.

Analysis in the Henry review shows company tax is one of the most economically damaging – worse than personal tax, fuel taxes, land tax and the goods and services tax.

“In a world of increased capital mobility, company income tax and other taxes on investment have a major impact on decisions by businesses on where to invest, how much and what to invest in and where to record their profits," the Henry report says.

“Australia has been successful over recent decades in attracting foreign capital to finance relatively high levels of domestic investment.

“While the continuing growth of China and India, and the consequent strength in Australia’s terms of trade, should ensure continued strong investment in Australia’s resources sector, attracting investment in other sectors may become more challenging."

Swan says independent modelling shows that a 1 percentage point cut to the company tax rate will add about $3 billion to GDP every year in the longer term.

Presumably, that modelling looks at Australia in isolation and does not take into account other countries cutting their tax rates simultaneously.

For example, New Zealand, Australia’s closest competitor economy, recently announced that it would cut its company tax to 28 per cent.

And Britain, which has rung up massive debt and budget deficits, will cut its corporate rate to 24 per cent by 2014.

This partly explains why corporate Australia was so underwhelmed by the government’s more modest plans, and why it united with such hostility in opposition to the resources tax when the recommendation for a 25 per cent company rate was not adopted.